Starbucks accelerates its invasion of third and fourth-tier cities

Author | Zheng Qiao

Editor | Wang Xiaojuan

Starbucks is quietly changing the coffee map of third- and fourth-tier cities in China.

In its latest financial report, Starbucks China revealed plans to accelerate store expansion in lower-tier cities and new county-level markets.

While withdrawing from the price war, Starbucks is speeding up its invasion of third- and fourth-tier cities, a strategy to cope with weak performance.

Recently, Starbucks released its quarterly financial results for the period ending September 29, 2024, as well as its performance for the entire fiscal year 2024. In the fourth quarter, the company's operating revenue was $9.07 billion, a year-on-year decline of 3.2%; the net profit attributable to the listed company was $910 million, a year-on-year decrease of 25.4%.

Looking at the annual performance, like many companies, Starbucks has fallen into the dilemma of increasing revenue without increasing profit. In fiscal year 2024, Starbucks' total revenue was $36.18 billion, a year-on-year increase of 0.6%; however, the net profit attributable to the listed company was $3.76 billion, a year-on-year decline of 8.8%.

While increasing the number of new stores is undoubtedly a key method to enhance overall performance, the fierce competition in the coffee market is reflected in the decline in same-store sales. In the fourth quarter, Starbucks' global same-store sales fell by 7%, with a 6% decline in the U.S. market and a 14% decline in the Chinese market.

In response to the decline, Starbucks Chief Financial Officer Rachel Ruggeri explained that the drop in same-store sales in the Chinese market was mainly due to a decrease in non-member foot traffic, an increase in promotional efforts due to the promotional environment, and consumers being more cautious about purchasing high-priced products.

After many coffee brands competed to launch "9.9 yuan" promotional activities, Starbucks also briefly participated in the price war in the Chinese coffee market; however, the price reduction strategy did not help Starbucks escape its performance predicament.

Having tasted the price war, Starbucks realized that not only might it not be effective, but it could also harm the brand, leading to a decisive abandonment of the price war. Since Brian Niccol became the new leader of Starbucks, the company has completely canceled promotions such as "buy one get one free" and "50% off" that were pushed by the former CEO.

This aligns with Niccol's style. During his tenure as CEO of Chipotle, Niccol proposed not to have a breakfast menu and to stop low-efficiency promotional activities like "buy one get one free," instead emphasizing the company's quality advantages through the "For Real" marketing campaign.

Previously, Starbucks China CEO Liu Wenjuan also clearly stated that the company would refuse to fall into the quagmire of the price war. She stated, "We will continue to focus on the high-end coffee market, pursuing high-quality, profitable, and sustainable growth. We will base ourselves on the present, grow steadily, and will not sacrifice operating profit margins for sales."

Thus, entering county-level and lower-tier cities has become a new choice for Starbucks.

As the second-largest market after the United States, Starbucks China added 290 new stores in the fourth quarter and entered 78 new county-level markets. By the end of the quarter, Starbucks had a total of 7,596 stores in China, covering nearly 1,000 county-level markets An analyst told Wall Street Insight: "Some white-collar workers who work and study in high-tier cities are choosing to return to county towns, bringing back consumption habits similar to those in high-tier cities, which provides new market opportunities for Starbucks."

According to the "2024-2030 China Coffee Industry Market Deep Analysis and Investment Strategy Research Report" released by the China Economic Research Institute, coffee shops in China are mainly concentrated in first- and second-tier cities. As of February 20, 2024, the proportion of coffee shop numbers in first-tier, new first-tier, and second-tier cities is 14%, 23%, and 17%, respectively, totaling over 50%. With leading brands like Starbucks deepening their layout in the national market, there is still significant room for cultivating coffee consumption habits in third-tier cities and below.

Data shows that throughout the fiscal year, Starbucks China entered 166 new county-level markets, nearly doubling the number of new markets compared to the previous fiscal year. Currently, county-level cities such as Renqiu in Hebei and Xinmi in Henan have seen the presence of Starbucks.

However, entering county towns also poses new challenges for Starbucks. On one hand, coffee chains like Luckin, Kudi, and Manner are also flooding into county towns, making competition for coffee consumption fierce. For example, Luckin's distribution in third, fourth, and fifth-tier cities accounts for 15.78%, 10.26%, and 4.63%, respectively, and it covered 99% of third- and fourth-tier cities and 70% of fifth-tier cities in 2023.

On the other hand, county towns lack coffee consumption habits. Starbucks, as a relatively high-priced coffee brand, presents a certain threshold for consumers in county towns.

However, it is well known that Starbucks' uniqueness lies not only in providing coffee but also in offering the experience of a "third space." What Starbucks sells is not just products, but experiences, services, and culture, with a particular emphasis on social content.

Yet, the lifestyle in county towns differs from that in large cities, and it remains uncertain whether Starbucks' "third space" will be recognized by users in county towns. Additionally, while new Starbucks stores may experience high foot traffic in their initial opening phase, maintaining stable customer flow and repurchase rates as novelty wears off is also a challenge that Starbucks needs to face.

Starbucks founder Schultz once stated that the company plans to open over 10,000 stores in China. As Starbucks gradually completes its layout in first- and second-tier cities, county towns will become their primary market.

Starbucks' downward strategy is not only a form of expansion but also a declaration of deeply exploring the Chinese market